In some ways, it can be said that Social Security has failed to live up to the goal of helping the most downtrodden Americans. The debate over the agency’s progressive features, or lack thereof, has been going on for many years.

Some supporters say Social Security is progressive and achieves its goals. One group is the Investment Company Institute, a mutual-fund trade group that says government paid benefits replace a much higher percentage of working-year earnings for lower-paid Americans. This is especially true when you take into consideration the fact that low earners pay less in Social Security payroll taxes during their working lives.

However, there are some factors that make Social Security less progressive than intended. Many of people die before they claim any benefits. For this reason, many Americans file earlier than they otherwise would, locking in benefits at a low level. Poor people don’t live as long as wealthier people so they tend to claim early and not receive benefits for as many years. Social Security benefits are based on earnings, lower-earning Americans receive lower benefits.

Other factors impact how much money people receive from their Social Security benefits. One progressive feature: there is a cap on monthly benefits. In 2018, it’s nearly $2,800. That means billionaires won’t receive anything more than a retail clerk, which counts one for the progressive side.

On the other hand, what you receive in benefits is partly based on how much you earned and how much you paid in payroll taxes. That tax rate is 6.2%, whether you are a middle manager or a millionaire. Therefore, the income replacement part of Social Security is progressive, but there are tax and other aspects that make the entire picture somewhat murky.

Here are some pointers for making Social Security part of an economically successful retirement:

Delay claiming benefits if you can past age 62. Benefits increase about 8% each year, up to age 70.

Work longer, if you can. Even a few more years of working and delaying claiming Social Security, can be a boost to your retirement income.

Contribute whatever you can to workplace plans. At least contribute enough to make the most of any matching plans from your employer.

If you don’t have an IRA at work, open one on your own.

Use the retirement saver’s credit, a federal tax benefit worth up to $2,000 for an individual (and $4,000 for joint filers) to help low-income people afford an IRA or 401(k) plan.

Be mindful of tax liabilities when you take withdrawals from retirement savings accounts. You should also remember that withdrawals could impact your Social Security benefits and make them partially taxable.

Not everyone takes a step back to think this way, but it is a smart thing to do. With proper planning, your retirement could lead to better results for your investments and a better decision on when to take Social Security benefits.

First, viewing Social Security as part of your investment portfolio is easy to do but not that widely followed. If you think of your Social Security benefits as a conservative portion of your overall investment portfolio, it may give you a little leeway to be more aggressive with investments than you might otherwise be. Remember to acknowledge your comfort level with the amount of risk, so you can sleep at night.

Social Security retirement benefits are very low risk, since they pay steady, government backed income with no market fluctuations. You don’t want to make a dramatic portfolio shift based on this, but you might change up your equity exposure by 5% to 10% of your portfolio, assuming that you’ve been risk averse up to now.

If you already have ample growth investments, thinking of Social Security as part of your overall portfolio might give you reason to trim your equity holdings. By using Social Security as your backstop, your investments may not need to work as hard and you don’t have to put yourself in a risky position.

How about tapping IRAs early, to avoid claiming Social Security benefits until as late as possible? It’s not a bad idea, since the payout from Social Security grows at 8% each year you wait, up to age 70. Most retirees start taking Social Security earlier, then get locked into a lower benefit.

If your income is lower in your 60s, your income taxes will be lower, so the level that your IRA withdrawals will be taxed will also be lower.

What about the stability of Social Security? It’s not certain that Social Security will remain fully funded without some government intervention. The latest annual report from the Social Security trustees estimates that if no changes are made, the system will be paying most but not all promised benefits by 2034, when the “trust fund” money runs out. However, as long as Americans are working and payrolls are generating money for Social Security, benefits will be available to pay future retirees.

An estate planning attorney can work with you to create an estate plan and get the best results from your retirement opportunities.

Few of us need less money in our retirement accounts. Most of us enjoy the tax benefits we get from retirement accounts. Americans, in general, do a terrible job of saving for retirement. Some say the IRA, Roth IRA and other similar accounts were created to give us an incentive to do a better job. The tax advantages of these accounts make it more attractive to sock away money every year. These accounts were also set up with deliberate penalties, so people wouldn’t raid their accounts every time they needed a few extra dollars.

If you are among those who work for companies that have a retirement savings plan match, make the most out of it. If you put in the annual percentage or amount your plan requires, your employer will match that contribution. Most workers walk away from this money. However, it’s free money!

Employees usually are offered a 401(k), 403(b) or 457 plan from their employer. The financial institution is already chosen, the money is automatically taken out of your paycheck and often you can only make decisions about what kind of funds you can select at certain times of the year. In 2018, you can contribute up to $18,500. If you’re 50+, you can make an additional $6,000 contribution, known as a catch-up contribution.

Self-employed? You need a retirement plan more than someone who works for a company. Self-employed people have many more options. If you need help, talk to your CPA. There may be some plans that are better suited or have more tax advantages than others.

For self-employed people, the basic choices are the solo 401(k) for a sole proprietor or someone working with their spouse. You can make contributions as both the employer and the employee. You could contribute as much as $55,000 in 2018 (or, if you are 50+, $61,000). Your total contributions are determined by your net business income.

Another choice for retirement savings for the self-employed is a SEP IRA, the Simplified Employee Pension. It’s easier to set up than a 401(k)and is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to a quarter of your income, or $55,000, or whichever is less. There are no catch-up contributions for a SEP IRA.

Self-employed or working for a company, your retirement plan needs to include an estate plan. Your estate planning attorney will be able to help you with a will, power of attorney and healthcare directive.

11/01/2017

If you are a person who has been named as the beneficiary of an IRA, then you have some decisions to make. They need to be good decisions or it could end up costing you, according to the Wills, Trusts & Estates Prof Blog in "Practical Issues When an IRA Owner Dies."

Because IRA accounts are given to beneficiaries directly and are not part of the estate, they do not go through probate.

However, the importance of IRAs to overall inheritances can be enormous. Therefore, it is vital that their administration be carefully considered.

The biggest thing to understand is that there are tax consequences for any decisions made about what to do with the IRA. Those consequences are not the same for everyone.

They depend on the relationship between the beneficiary and the deceased. These tax consequences are big enough, that it is important to seek professional tax advice and to do so quickly.

There are penalties, if decisions are not made within certain time limits.

If you are not certain who to talk to about what to do with an inherited IRA, then talk to the attorney who is assisting with the administration of the estate. He can point you in the right direction.

04/28/2016

Despite not always needing to take money out of their IRAs and 401Ks, seniors have been limited in gaining some growth in their accounts by mandatory distributions from the accounts. However, as Smoke Signals reports in "A new, liberating IRA option is available," seniors now have the choice to take lower amounts out of their retirement accounts.

While the rules in the past have required seniors to withdraw minimum amounts from their retirement accounts beginning at age 70½ based on their life expectancies as determined each year by complicated IRS charts, the new policy allows account holders to defer up to $125,000 or 25% of the total amount in their accounts, whichever is lower. The amount deferred does not factor into the required minimum distribution calculation.

The deferment can be taken until age 85, but the money must be placed in a qualified longevity annuity contract as the only premium payment of that annuity. The money placed into the annuity will continue to grow and payments will be made on the annuity when the deferment age is reached.

This new option allows seniors – who don't need to take money out of their retirement account – to continue to increase their income if they wish to preserve those accounts as part of their estates or if they anticipate living longer and might need the money later.

People who create their own Roth IRAs are not required to take minimum distributions. However, those who inherit them are required to do so.

All of the money in an IRA does not need to be taken out at once. Those who inherit can elect to take required minimum distributions based on their own life expectancy. This option must be initiated by December 31 of the year following the death of the original account holder.

People who choose not to take out required minimum distributions must withdraw the full amount of the IRA within five years of the account owner's death. This option is available when the account originator passed away before reaching the age of 70½.

Spouses can choose to treat the IRA as their own or as an inherited IRA. The rules must then be followed for whichever option the surviving spouse elects.

Transferring an inherited IRA can only be done by moving it directly from one custodian to another. The funds cannot be withdrawn by the inheritor and later moved into a new IRA.

The rules and options can be confusing and an estate planning attorney could be helpful in meeting the challenges.

04/12/2016

Individual retirement accounts are an important part of many estate plans. By designating a beneficiary for the account the funds can pass to another person automatically without having to go through probate. However, if the primary beneficiary of your IRA passes away before you do, then the IRA might have to go through your estate. That can cause problems as a recently released ruling by the IRS illustrates.

In this case the primary beneficiary of an IRA and a Roth IRA passed away before the testator. As a consequence the accounts had to go through the estate. As the sole beneficiary of the estate, the IRA and Roth IRA went to the deceased's spouse.

The spouse elected to roll over the IRA and Roth IRA into her own IRA. The IRS determined that she could do that. However, she was only allowed to do so because of the particular facts of this case and some language in the preamble of the regulations, not the body of the regulations.

This is important because the ruling seems to indicate that in other situations the result would not be as favorable. To guard against such outcomes it is important to designate a contingent beneficiary on your IRA. That is someone to whom it will pass if the primary beneficiary has already passed away.

01/07/2016

Seniors have often used donations to charities as a method to reduce the size of an estate for tax reasons as well as philanthropic reasons.

In 2006, Congress made it much easier for many people over 70½ to make donations. They could donate up to $100,000 directly from their traditional IRAs to charity without facing income tax penalties. However, as Congress so often does this charitable rollover exclusion was not made a permanent part of the tax code. It required periodic reauthorization.

It has recently been made permanent retroactive to Jan. 1, 2015 as reported by the Wills, Trusts & Estates Prof Blog in an article entitled "Congress Makes Permanent IRA Charitable Rollover Exclusion." Of course, this does not mean the exclusion cannot be taken out of the tax code by Congress later. It just means that it does not need reauthorization to stay in the code.

While this is a great benefit for elderly people trying to spend down their estates, it is important to remember not to start the spend down process without first consulting an estate planning attorney. Dealing with the estate tax and reducing the size of an estate should be handled as part of a larger estate plan.

The charitable rollover exclusion is the best option for some people but it is a wise course of action to consult with an estate planning attorney for all options available.

Designate Your Beneficiaries. You can list your beneficiaries on your retirement accounts (401(k), 403(b), IRA, etc.) when you complete the application. Likewise, you can designate your beneficiaries on bank and investment accounts by setting up a TOD (Transfer on Death) designation. It’s easy to do and costs nothing. Remember that beneficiary designations supersede any wish you make in a will.

Draft Your Will. A will is a legal document and is a written statement of your intentions, including where you want your possessions to go and how you want the orderly disposition to happen. See an attorney, as each state has different laws.

State Your Health Care Wishes. Use a Health Care Proxy to let someone you trust make health care decisions and carry out your health care wishes in the event that you are incapacitated.

Sign a Durable Power of Attorney. This form allows someone you trust to make financial decisions in the event you are unable to do so. There is a huge difference between a limited power and durable power of attorney. Talk to your estate planning attorney about these documents.

An experienced estate planning attorney can spend time with you and review your estate issues, complete a will, health care proxy, durable power of attorney, and check beneficiaries, as well as any tax issues. Use an attorney who specializes in this area to ensure your wishes are properly documented and you achieve what you are trying to accomplish, now and in the future.

An SEP-IRAis similar to a traditional IRA in that the investment earnings grow taxed-deferred until they are withdrawn. However, a self-employed individual can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are calculated as the lesser of 20% of net business income or $52,000 for 2014, $53,000 for 2015.

A Solo 401(k) is for self-employed individuals with no employees. Your spouse is not included in the employee count and is permitted to contribute to the plan if he or she is employed by the business. This 401k can be structured as a traditional 401(k) or as a Solo Roth. The maximum 2015 contribution is $53,000 or $59,000 for those 50 and older. The contribution includes (i) an annual employee deferral up to 100% of compensation or earned income for a self-employed individual (to a maximum of $18,000 and $24,000 if 50 or older), which allows some to contribute more to a Solo 401(k) than to a SEP-IRA; and (ii) an employer discretionary contribution of up to 25% of compensation as defined by the plan or 20% of earned income for a self-employed individual.

One advantage a 401(k) offers over an IRA is that you can borrow from a 401(k). If you opt for Solo Roth 401(k), there’s no deduction, but withdrawals are tax-free if you wait until you’re 59½. The plan lets you save much more than a Roth IRA. Another advantage for the Solo Roth 401(k) is that contributions aren’t subject to income limits (unlike the Roth IRA).

Which is better… a Roth or traditional IRA?It depends on many factors. If you expect to be in a higher tax bracket in the future, the Roth version may make more sense, but if your current tax rate is low, it might be better to forgo a deduction now in order to withdraw money tax-free when you’re in a higher bracket in the future. What’s nice is that it doesn’t have to be an “either-or” proposition: you can have both traditional and Roth 401(k) plans and divide contributions between them.

For most self-employed individuals, the SEP-IRA may be a better choice than a traditional IRA because the contribution limits are much higher. Also, deductions for traditional IRA contributions are limited by income for participants who are covered or whose spouse is covered by a retirement plan at work.

Talk to a qualified estate planning attorney to see how these IRA options may fit into your strategy.